Is the market during COVID-19 a good entry point for new investors?
02 July 2020
Question by Ben
I am planning on investing in the stock market. Due to the COVID-19 downward trend on the market, I decided it might be a good entry point for someone like me who has never invested in stocks and shares before. I am 24 years old and I am earning a decent salary, contributing to a pension pot which my company matches. I have put aside an emergency pot worth 6 to 12 month. I do not own a property and have no mortgage. I am planning on investing for the next 5 to 10 years when I would like to buy a property. My risk appetite would be medium to high. I am thinking of investing with Vanguard mainly due to their low costs and easy to use and understand platform. I am wondering if I should go for a fund like Vanguard LifeStrategy 80% or 100% equity or choose individual funds to invest in. As I mentioned my investment knowledge is limited and I would prefer not to tinker too much with my portfolio if I can. Another question is if I should do a lump sum investment of £5000 now or drip feed it. Since the markets are going down, drip feeding seems like the better option right now.
Answered by Holly Mackay
Lots of things to consider here. You sound like you are prepared for the market volatility of investing. As a word of warning as a first-timer, a 100% equity portfolio will be a bumpy ride. For a 10 year timeframe it’s not necessarily a bad option, but make sure you are mentally prepared!
You say you are investing for a property. In that case you should read up on the Lifetime ISA - which comes as a Cash or a Stocks & Shares version.
You get 25% contributions from the Government – so if you save up to £4,000 a year here, they will give you £1,000. There are penalties if you don’t use this to buy a property and take the money out before you retire so do read up on this.
Vanguard is a good option for a newcomer as their LifeStrategy range you mention sees them taking all of the day-today decisions. They do not have a Lifetime ISA but you can always open up a Lifetime ISA with another platform and buy the Vanguard fund there. Have a look at AJ Bell Youinvest for a low-cost option. Hargreaves Lansdown is also cheap for a £5,000 investment.
Both platforms will allow you to deposit the full amount this tax year if you get your skates on and then this can sit in the account as cash, and you can set up regular buy instructions to drip feed this into markets as little at a time. This will certainly help smooth out the volatility we’re seeing at the moment. This could be £500 a month, or £1,000 a month for example.
Do read up on the Lifetime ISA, get familiar with the penalties and weigh these up against the Government freebies. And then work out your timeframe.
The 100% equity option will likely do better over the long-term but in markets like these it will also tank the most. So timeframes are important. The 80% option will not do as well in stellar years, but will be cushioned slightly against falls such as the ones we have seen most recently.
Hope that helps.